With billions of pounds of oil and gas projects cancelled, North East supply chain companies are having to look to other offshore markets and beyond.

The news in the oil and gas sector does not get much better with the latest update predicting just six projects getting under way in 2015, while the global service sector is geared up for at least 50 new projects a year.

With work stream drying up and the projects already under way being re-priced with downward cost reduction of up to 30%, many supply chain companies are being forced to dramatically innovate, cut costs and look at other markets.

Tony Trapp is executive chairman of Osbit Power, which recently secured some major multi-million pound contracts designing equipment in the offshore oil and gas sector, but it continues to maintain a broad outlook on its potential workstream.

He said Osbit likes to think of itself as resembling a three-legged stool; referring to the oil and gas, renewables and decommissioning sectors and this diversification can help if one sector is having a tough time.

Osbit recently participated in an NOF Energy event in the North East looking at the opportunities in the decommissioning sector for the region’s supply chain.

Mr Trapp said: “In the current environment decommissioning activity will increase and this will present new opportunities for the North East supply chain.”

He urged supply chain companies to attend these type of events, and as well as the well as the decommissioning one, NOF also recently held an event focusing on opportunities in the offshore wind industry.

Dong Energy has emerged as the major player in the UK market and its vice president, head of asset management & UK country manager Benj Sykes addressed the gathering in Sedgefield.

He said: “Offshore wind is a real success story in the UK and has played a pivotal role in the country’s renewable energy transformation.

“The offshore wind developer community has an aspiration to reach 50% local content on our UK wind farm projects by 2020, which can be achieved through establishing relationships with innovative, efficient and technology-led suppliers.”

In the last few years Osbit Power has developed a growing reputation for its ability to deliver innovative new solutions to the offshore sector which include the MaXcess system which facilitates access to offshore turbines.

Nevertheless Mr Trapp said: “It can be difficult to break into new markets. I have started three business and it doesn’t get any easier. It’s important to build up a rapport and establish a track record, but starting from scratch is extremely difficult.”

Osbit now works with some of the major tier one contracts such as Saipem, Helix, Technip and Subsea 7.

Its own supply chain comprises of at least 50 companies in the North East including those for fabrication work, paint-shopping and machining.

Mr Trapp continued: “There are no set rules, a supplier may one day turn out to be customer. It can be complex but the important thing is to be very active looking at all opportunities across all sectors.

“And for businesses to be successful they have to focus on innovation.”

First look around at the official opening of the Reece Group Armstrong Works factory in Scotswood

One North East industrial conglomerate, the Reece Group, has created a separate division - Reece Innovation - to do jut that.

Last month the company unveiled the new headquarters for all five of its division on the Armstrong Works in Newcastle. As well as Reece Innovation they include Pearson Engineering and Responsive Engineering.

Reece Innovation is headed by Dr James Martin who says it maintains a wide perspective across the energy piece.

“Condition monitoring performance is a particular area of interest. Systems which permit critical monitoring on an ongoing basis before a catastrophic event is an area where we can bring a lot to the party. Our devices are already in use in the water industry,” he said.

Dr Martin also highlighted offshore wind as an area of particular interest.

“The repairs costs are massive. Including the costs of hiring a vessel they can be upwards of £200,000 a day. Systems that can reduce manpower hours and the need for visual inspections have great potential in this developing industry.”

He says the company is also looking at new ways of supporting drilling for oil and gas, including shale gas.

“If and when a shale gas industry develops we will have to drill long horizontal wells and there will be a great need for high performance. Oil well centralisers that keep the pipe in the centre of the drill hole will be important in horizontal drilling.”

Although he cautions it may be some time before the industry gathers momentum in the UK and he believes the lifting costs in the UK will be higher than the US due to stricter environmental regulations.

Nigel Robinson, director, offshore projects & engineering of offshore design and engineering specialists Houlder said: “There is a sharp reduction in project activity at the moment, so to survive, companies are wise to have interests in more than one industry and also in other geographies which are less affected by the drop in oil price.

“Houlder are diversified in that we support any marine industry, from oil and gas to shipping to LNG to renewables. We are building a wider geographical position so we can continue to grow.”

Nick Oates, who heads Houlder’s North East office, said: “The strongest area for us at the moment is renewables. We have a major project to design a new wind farm installation vessel, and our innovative marine equipment unit is busy with lifting and handling tools for offshore wind farm installation.”

Business George Rafferty chief executive of NOF Energy

With the North Sea having some of the highest lifting costs anywhere in the world there are increasing signs that many operators are moving closer to decommissioning assets.

Decom North Sea says decommissioning is set to grow to a £2bn a year market by 2020. In the few last months Nexen confirmed plans to start decommissioning the Ettrick and Blackbird fields 75 miles north east of Aberdeen, and Maersk has said it will close its Janice field.

Teesside firm Able UK has won the biggest contract to date on the dismantling of the Shell Brent field which is set to create 200 Teesside jobs when it gets under way next year.

In the offshore wind sector the Government has sanctioned billions of pounds of projects in UK waters and Siemens has begun work on its new turbine manufacturing facilities on Humberside

George Rafferty, chief executive of Durham-based supply chain representative body NOF Energy, said: “Despite current landscape of the industry, the supply chain has, for some time, understood their role in helping deliver a balanced energy future for UK and international markets.

“Within the North East is a rich seam of companies that have diversified their skills, products and services to meet the requirements of alternative sectors such as offshore wind, alongside the increasing requirements of the oil and gas decommissioning industry.

“These markets are benefiting from the innovation and experience of supply chain companies that have an enviable track record and the foresight to diversify.

“There are, of course, companies yet to enter new markets and we would encourage them to take advantage of the support and guidance being offered by organisations like NOF Energy, which have extensive market knowledge and access to operators and contractors keen to engage with new and innovative suppliers.”

UKCS now in decline

Dr James Martin is an experienced oil industry veteran who has worked for operators such as Statoil and service companies such as Schlumberger. He believes this current oil price slump is focusing minds as never before.

The Reece Innovation boss said: “The operators are still in the cost cutting phase, but there is little real evidence of cost reductions, it’s been more a case of restructuring the workforce resulting in huge job losses at both the operators and service companies.

“The oil companies are looking for efficiencies, on making things last longer but there is little investment in new fields and projects are being cancelled, or mothballed.

“The major problem is that the North Sea in rapid decline, and as a result the big companies, such as Total are looking to reduce their presence, and the smaller operators will run their operations on a tighter budget.”

Gaining control of costs is proving difficult with the North Sea being one of the most expensive global basins in which to operate, although Oil &amp; Gas UK says progress is being made here.

Dr Martin says that in this environment innovation is the key.

“In the North Sea there is a need to reduce costs and people are expensive so in the future they will be looking to automatic turret production platforms tied back to an FPSO (Floating Production Storage and Offloading) vessel.”

He continued: “I have been through seven cycles in the 30 years in the oil and gas industry. Previously it has been a blip but this is really focussing minds on the future.”

“This period of volatility is catastrophic and much more to do with geo-political as opposed to cyclical factors. The Saudis do not want to cut production, and Iran Iraq and Libya are back producing.

“But when the oil companies begin looking to the future and look at replenishing their reserves they will be looking to the technology that they need and the North east and companies such as Reece Innovation will be able to play a part in that.”

Next week we will take a closer look at the opportunities for the North East supply chain in decommissioning sector.